[Congressional Record Volume 147, Number 115 (Thursday, September 6, 2001)]
[House]
[Pages H5442-H5445]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                 THE U.S. DOLLAR AND THE WORLD ECONOMY

  The SPEAKER pro tempore. Under the Speaker's announced policy of 
January 3, 2001, the gentleman from Texas (Mr. Paul) is recognized for 
60 minutes as the designee of the majority leader.
  Mr. PAUL. Mr. Speaker, I have taken a Special Order today to address 
the subject of the U.S. dollar and the world economy, and in the words 
of James Madison, the pestilent effects of paper money.
  Mr. Speaker, Congress has a constitutional responsibility to maintain 
the value of the dollar by making only gold and legal silver tender and 
not to emit bills of credit, that is, paper money. This responsibility 
was performed relatively well in the 19th century despite the abuse of 
the dollar suffered during the Civil War and despite repeated efforts 
to form a Central Bank.
  This policy served to maintain relatively stable prices, and the 
shortcomings came only when the rules of the gold standard were ignored 
or abused.
  In the 20th century, however, we saw the systematic undermining of 
sound money with the establishment of the Federal Reserve System in 
1913 and the outright rejection of gold with the collapse of the 
Bretton Woods agreement in 1971. We are now witnessing the effects of 
the accumulated problems of 30 years of fiat money, not only the dollar 
but also all the world currencies, something the world has never before 
experienced.
  Exactly how it plays out is yet unknown. Its severity will be 
determined by future monetary management, especially by the Federal 
Reserve. The likelihood of quickly resolving the deeply ingrained and 
worldwide imbalances built up over 30 years is remote. Yielding to the 
addiction of credit creation, as has been the case with every market 
correction over the past 30 years, remains irresistible to the central 
bankers of the world. Central planners who occupy the seats of power in 
every central bank around the world refuse to accept the fact that 
markets are more powerful and smarter than they are.
  The people of the United States, including the U.S. Congress, are far 
too complacent about the seriousness of the current economic crisis. 
They remain oblivious to the significance of the U.S. dollar's fiat 
status. Discussions about the dollar are usually limited to the 
question of whether the dollar is now too strong or too weak. When 
money is defined as a precise weight of a precious metal, this type of 
discussion does not exist. The only thing that matters under that 
circumstance is whether an honest government will maintain 
convertibility.
  Exporters always want a weak dollar; importers, a strong one. But no 
one demands a stable, sound dollar, as they should. Manipulation of 
foreign trade through competitive currency devaluations has become 
commonplace and is used as a form of protectionism. This has been going 
on ever since the worldwide acceptance of fiat money 30 years ago. 
Although some short-term advantage may be gained for certain 
manufacturers and some countries by such currency manipulation, it only 
adds fuel to the economic and financial instability inherent in a 
system of paper money.
  Paper money helps the strong and hurts the weak before it self-
destructs and undermines international trade. The U.S. dollar, with its 
reserve currency status, provides a much greater benefit to American 
citizens than that which occurs in other countries that follow a very 
similar monetary policy. It allows us to export our inflation by buying 
cheap goods from overseas while our dollars are then lent back to us to 
finance our current account deficit. We further benefit from the 
confidence bestowed on the dollar by our being the economic and 
military powerhouse of the world, thus postponing the day of reckoning. 
This permits our extravagant living to last longer than would have 
otherwise occurred under a gold standard.
  Some may argue that a good deal like that should not be denied, but 
unfortunately the piper must eventually be paid. Inevitably the 
distortions such as our current account deficit and foreign debt will 
come to an end with more suffering than anyone has anticipated.
  The monetary inflation of the 1990s produced welcomed profits of $145 
billion for the NASDAQ companies over the 5 years between 1996 and 
2000. Astoundingly, this entire amount was lost in the past year. This 
does not even address the trillions of dollars of paper losses in stock 
values from its peak in early 2000. Congress has expressed concern 
about the staggering stock market losses but fails to see the 
connection between the bubble economy and the monetary inflation 
generated by the Federal Reserve.
  Instead, Congress chooses to blame the analysts for misleading 
investors. The analysts may not be entirely blameless, but their role 
in creating the bubble is minimal compared to the misleading 
information that the Federal Reserve has provided with artificially low 
interest rates and a financial market made flush with generous new 
credit at every sign of correction over the past 10 years.

  By preventing the liquidation of bad debt and the elimination of 
malinvestment and overcapacity, the Federal Reserve's actions have kept 
the financial bubble inflated. Of course, it is an easy choice in the 
short run. Who would deliberately allow the market tendency to deflate 
back to stability? That would be politically unacceptable.
  Talk of sound money and balanced budgets is just that. When the 
economy sinks, the rhetoric for sound policy and a strong dollar may 
continue, but all

[[Page H5443]]

actions by the Congress and the Fed will be directed toward reinflation 
and a congressional spending policy oblivious to all the promises 
regarding a balanced budget and the preservation of the Social Security 
and Medicare Trust Funds.
  But if the Fed and its chairman, Alan Greenspan, have been able to 
guide us out of every potential crisis all the way back to the stock 
market crash of 1987, why should we not expect the same to happen once 
again? Mainly because there is a limit to how long the monetary charade 
can be perpetuated. Now it looks like the international financial 
system built on paper money is coming to an end.
  Modern day globalism since gold's demise 30 years ago has been based 
on a purely fiat U.S. dollar with all other currencies tied to the 
dollar. International redistribution and management of wealth through 
the IMF, the World Bank, and the WTO have promoted this new version of 
globalism. This type of globalism depends on trusting central bankers 
to maintain currency values and the international institutions to 
manage trade equitably, while bailing out weak economies with dollar 
inflation. This, of course, has only been possible because the dollar's 
strength is perceived to be greater than it really is.
  Modern day globalists would like us to believe they invented 
globalism. Yet all they are offering is an unprecedented plan for 
global power to be placed in the hands of a few powerful special 
interests.
  Globalism has existed ever since international trade started 
thousands of years ago. Whether it was during the Byzantine Empire or 
the more recent British Empire, it worked rather well when the goal was 
honest trade and the currency was gold. Today, however, world 
government is the goal. Its tools are fiat money and the international 
agencies that believe they can plan globally, just as many others over 
the centuries believed they could plan domestically, ignoring the fact 
that all efforts at socialism have failed.
  The day of reckoning for all this mischief is now at hand. The dollar 
is weakening in spite of all the arguments for its continued strength. 
Economic law is overruling political edicts. Just how long will the 
U.S. dollar and the U.S. taxpayers be able to bail out every failed 
third-world economy and pay the bills for policing the world? U.S. 
troops are now in 140 nations around the world. The answer is certainly 
not forever and probably not much longer, since the world economies are 
readjusting to the dislocations of the past 30 years of mismanagement 
and misallocation of capital characteristic of fiat money.
  Fiat money has been around for a long time off and on throughout 
history, but never has the world been so enthralled with the world 
economy being artificially structured with paper money and with a total 
rejection of the anchor that gold provided for thousands of years.

                              {time}  1615

  Let there be no doubt, we live in unprecedented times and we are just 
beginning to reap what has been sown the past 30 years. Our government 
and the Federal Reserve officials have grossly underestimated the 
danger.
  Current concerns are expressed by worries about meeting the criteria 
for a government-declared recession and whether a weaker dollar would 
help. The first is merely academic, because if you are one of the many 
thousands who have been laid off, you are already in a recession.
  The second does not make a lot of sense unless one asks, compared to 
what? The dollar has been on a steady course of devaluation for 30 
years against most major currencies and against gold. Its purchasing 
power in general has been steadily eroded.
  The fact that the dollar has been strong against Third World 
currencies and against most major currencies for the past decade does 
not cancel out the fact that the Federal Reserve has systematically 
eroded the dollar's value by steadily expanding the money supply. 
Recent reports of a weakening dollar on international exchange markets 
have investment implications, but do not reflect a new policy designed 
to weaken the dollar. This is merely the market adjusting to 30 years 
of systematic monetary inflation.
  Regardless of whether the experts demand a weak dollar or a strong 
dollar, each inevitably demands lower interest rates, hoping to spur 
the economy and save the stock market from crashing. But one must 
remember that the only way the Federal Reserve can lower interest rates 
is to inflate the currency by increasing the money supply and by 
further debasing the currency.
  In the long term, the dollar is always weakened even if the economy 
is occasionally stimulated on a short-run basis. Economic growth can 
hide the ill effects of monetary inflation by holding some prices in 
check, but it cannot prevent the overcapacity, the malinvestment which 
causes the economic downturn.
  Of course, the central bankers cling to the belief that they somehow 
can prevent the ugly corrections known as ``recessions.'' Economic 
growth, when artificially stimulated by money growth and low interest 
rates, generates the speculation we have seen in the stock, bond and 
real estate markets, along with the accumulation of excessive debt. 
Once the need for rectifying the overcapacity is recognized by the 
market, these imbalances are destined to be wiped out.
  Prolonging the correction phase with the Fed's effort to reinflate by 
diligently working for a soft landing, or even to prevent a recession, 
only postpones the day the economy can return to sustained growth. This 
is a problem the United States had in the 1930s and one that Japan has 
experienced for more than a decade with no end in sight.
  The next recession, from which I am sure we are already suffering, 
will be even more pervasive worldwide than the one in the 1930s due to 
the artificial nature of modern globalism with world paper money and 
international agencies deeply involved in the economy of every nation. 
We have witnessed the current and recent bailouts of Mexico, Argentina, 
Brazil, Turkey, and countries in the Far East. While resisting the 
market's tendency for correction, faith in government deficits and 
belief in paper money inflation will surely prolong the coming 
worldwide crisis.
  Alan Greenspan made a concerted effort to stave off the 1991-1992 
recession with numerous reductions in the Fed funds rate, to no avail. 
The recession hit, and most people believe it led to George Bush's 
defeat in the 1992 election. It was not that Greenspan did not try. In 
many ways, the Bush people's criticism of Greenspan's effort is not 
justified. Greenspan, the politician, would have liked to please the 
elder Bush, but was unable to control events as he had wished.
  This time around, however, he has been much more aggressive, with 
half-point cuts, along with seven cuts in just the last 8 months, for a 
total of 3 points cut in the Fed funds rate. But, guess what? So far, 
it has not helped; stocks continue to slide and the economy is still in 
the doldrums. It is now safe to say that Greenspan is pushing on a 
string.
  In the year 2000, bank loans and commercial paper were growing at an 
annualized rate of 23 percent. In less than a year, in spite of this 
massive influx of new credit, these loans have crashed to a rate of 
minus 5 percent.
  Where is the money going? Some of it probably has helped to prop up 
the staggering stock market, but that cannot last forever. Plenty went 
into consumption and to finance extravagant living. The special nature 
of the dollar as the reserve currency of the world has permitted the 
bubble to last longer. That would be especially beneficial to American 
consumers. But in the meantime, understandably, market and political 
forces have steadily eroded our industrial base, while our service 
sector has thrived.
  Consumers enjoyed having even more funds to spend as the dollars left 
manufacturing. In a little over a year, 1 million industrial jobs were 
lost, while saving rates sank to zero and capital investments 
plummeted. Foreigners continue to grab our dollars, permitting us to 
raise our standard of living, but unfortunately, it is built on endless 
printing of fiat money and self-limiting personal debt.
  The Federal Reserve credit created during the last 8 months has not 
stimulated economic growth in the technology or the industrial sector, 
but a lot of it ended up in the expanding real estate bubble, churned 
by the $3.2 trillion of debt maintained by the GSEs,

[[Page H5444]]

the Government Sponsored Enterprises. The GSEs, made up of Fannie Mae, 
Freddie Mac and the Federal Home Loan Bank, have managed to keep the 
housing market afloat, in contrast to the more logical slowdown in 
hotel and office construction. This spending through the GSEs has also 
served as a vehicle for consumption spending. This should be no 
surprise, considering the special status that the GSEs enjoy, since 
their implied line of credit to the U.S. Treasury keeps their interest 
rates artificially low.
  The Clinton administration encouraged growth in housing loans that 
were financed through this system. In addition, the Federal Reserve 
treats GSE securities with special consideration. Ever since the fall 
of 1999, the Fed has monetized GSE securities just as if they were U.S. 
Treasury bills. This message has not been lost by foreign central 
banks, which took their cue from the Fed and now hold over $130 billion 
worth of United States GSE securities.
  The Fed holds only $20 billion worth, but the implication is clear: 
Not only will the Treasury loan to the GSEs, if necessary, since the 
line of credit is already in place, but if necessary, Congress will 
surely accommodate with appropriations as well, just as they did during 
the savings and loan crisis of the 1970s.
  But the Fed has indicated to the world that the GSEs are equivalent 
to U.S. Treasury bills, and foreign central bankers have 
enthusiastically accommodated, sometimes by purchasing more than $10 
billion worth of these securities in 1 week alone. They are merely 
recycling the dollars we so generously print and spend overseas.
  After the NASDAQ collapsed last year, the flow of funds into real 
estate accelerated. The GSEs accommodated by borrowing without 
restraint to subsidize new mortgages, record sales and refinancing. It 
is no wonder the price of houses are rising to record levels.
  Refinancing especially helped consumers to continue spending, even in 
a slowing economy. It is not surprising for high credit card debt to be 
frequently rolled into second mortgages, since interest on mortgage 
debt has the additional advantage of being tax deductible.
  When financial conditions warrant, leaving financial instruments such 
as paper assets and looking for hard assets such as houses is 
commonplace and is not a new phenomenon. Instead of the newly inflated 
money being directed toward the stock market, it now finds its way into 
the rapidly expanding real estate bubble. This, too, will burst, as all 
bubbles do. The Fed, the Congress or even foreign investors cannot 
prevent the collapse of this bubble, any more than the Japanese banks 
were able to keep the Japanese miracle of the 1980s going forever.
  Concerned Federal Reserve economists are struggling to understand how 
the wealth effect of the stock market and real estate bubbles affect 
economic activity and consumer spending. It should be no mystery, but 
it would be too much to expect the Fed to look to itself and its 
monetary policy for an explanation and assume responsibility for 
engineering the entire financial mess we are in.
  A major problem still remains. Ultimately, the market determines all 
values, including all currencies. With the current direction of the 
dollar, certainly downward, the day of reckoning is fast approaching. A 
weak dollar will prompt dumping of GSE securities before Treasuries, 
despite the Treasury's and the Fed's attempt to equate them with 
government securities. This will threaten the whole GSE system of 
finance, because the challenge to the dollar and the GSEs will hit just 
when the housing market turns down and defaults rise.
  Also a major accident can occur in the derivatives market, where 
Fannie Mae and Freddie Mac are deeply involved in hedging their 
interest rate bets. Rising interest rates that are inherent with a weak 
currency will worsen the crisis.
  The weakening dollar will usher in an age of challenge to the whole 
worldwide financial system. The dollar has been the linchpin of 
economic activity, and a severe downturn in its value will not go 
unnoticed and will compound the already weakening economies of the 
world.
  More monetary inflation, even if it is a concerted worldwide effort, 
cannot solve the approaching crisis. The coming crisis will result from 
fiat money and the monetary inflation. More of the same cannot be the 
solution. Pseudo free trade, managed poorly and driven by fiat money, 
is no substitute for true free trade in a world with a stable commodity 
currency, such as gold.
  Managed trade and fiat money historically have led to trade wars, 
which the international planners pretend to abhor. Yet the trade war is 
already gearing up, and the WTO, purported to exist to lower tariffs, 
is actually the agency that grants permission for tariffs to be applied 
when complaints of dumping are levied.
  We are in the midst of a banana, textile, steel, lumber and tax war, 
all managed by the WTO. When cheap imports hit our market, it is a good 
deal for our consumer, but our manufacturers are the first to demand 
permission to place protective tariffs on imports. If this is already 
occurring in an economy that has been doing quite well, one can imagine 
how strong the protectionist sentiments will be in a worldwide 
slowdown.
  Congress is starting to realize that the budget forecast based on an 
overly optimistic growth rate of 3 percent is way off target, and even 
the pseudo surpluses are soon to be eliminated.
  Remember, the national debt never went down with the so-called 
surpluses. The national debt is currently rising at more than $120 
billion on an annualized rate, and is destined to get worse. Our dollar 
problem, which affects our financial and budgetary decisions, 
originated at the Fed with our country's acceptance of paper money 30 
years ago. Federal Reserve officials and other government leaders 
purposely continued to mislead the people by spouting the nonsense that 
there is no evidence of inflation as measured by government rigged 
price indices.
  Even though significant price increases need not exist for monetary 
inflation to place a hardship on the economy, stock prices, housing 
prices, costs of medical care and education and the cost of government 
have all been rising at very rapid rates. But the true inflation, 
measured by the money supply, is rising at a rate greater than 20 
percent as measured by MZM. This fact is ignored.
  The deception regarding price increases is supported to reassure us, 
and may do so for a while. The Fed never admits it, and the Congress 
disregards it out of ignorance, but the serious harm done by 
artificially low interest rates leading to malinvestment, overcapacity, 
excessive debt and speculation are the distortions that always 
guarantee the next recession.
  Serious problems lie ahead. If the Fed continues with the same 
monetary policy of perpetual inflation and the Congress responds with 
more spending and regulations, real solutions will be indefinitely 
delayed. The current problems hopefully will cause us as a nation and, 
in particular, Congress to reassess the policies that have allowed the 
imbalances to develop over these last 30 years.
  Some day, stable money, based on the gold standard, must be 
reconsidered. Stable money is a constitutional responsibility of 
Congress.

                              {time}  1630

  The Federal Reserve Board's goal of stable prices, economic growth 
and interest rates, through centralized economic planning, by 
manipulating money and credit, is a concoction of the 20th century 
Keynesian economics. These efforts are not authorized by the 
Constitution and are economically detrimental.
  Economic adjustments would not be so bad, as many mild recessions 
have proven, except that wealth is inexorably and unfairly transferred 
from the middle class and the poor to the rich. Job losses and the 
rising cost of living hurt some more than others. If our course does 
not change, the entire middle class prosperity can be endangered, as 
has happened all too often in other societies that pursued a false 
belief that paper money could be satisfactorily managed.
  Even the serious economic problems generated by a flawed monetary 
system could be tolerated, except for the inevitable loss of personal 
liberty that accompanies government's effort to centrally plan the 
economy through a

[[Page H5445]]

paper monetary system and ever-growing welfare state. Likewise, an 
imperialistic foreign policy can only be supported by inflation and 
high taxation.
  This policy compounds the threat to liberty because, all too often, 
our leaders get us involved in overseas military adventurism in which 
we should have no part. Today, that danger is greater than ever as we 
send our dollars and our troops hither and yon to areas of the world 
most Americans have no knowledge or interest in. But the driving force 
behind our foreign policy comes from our oil corporations, 
international banking interests, and the military industrial complex 
which have high-stake interests in the places our troops and foreign 
aid are sent.
  If, heaven forbid, the economy sinks as low and for as long as many 
free market economists believe, what policy changes must we consider? 
Certainly, the number one change ought to be to reject the ideas that 
created the crisis, but rejecting old ways that Congress and the people 
are addicted to is not easy. Many people believe that government 
programs are free. The clamor for low interest rates and, therefore, 
more monetary inflation, by virtually all public officials and 
prominent business and banking leaders is endless. And, the expectation 
for government to do something for every economic malady, even if ill-
advised government policy had created the problem in the first place, 
drives this seductive system of centralized planning that ultimately 
undermines prosperity. A realization that we cannot continue our old 
ways may well be upon us, and the inflating, taxing, regulating, and 
the centralized planning programs of the last 30 years must come to an 
end.
  Only reigning in the welfare-warfare state will suffice. This 
eliminates the need for the Fed to monetize the debt that politicians 
depend on to please their constituents and secure their reelection. We 
must reject our obsession with policing the world by our endless 
foreign commitments and entanglements. This would reduce the need for 
greater expenditures, while enhancing our national security. It would 
also remove pressure on the Federal Reserve to continue a flawed 
monetary policy of monetizing endless government debt.
  But we must also reject the notion that one man, Alan Greenspan, or 
any other chairman of the Federal Reserve, can know what the proper 
money supply and the proper interest rates ought to be. Only the market 
can determine that. This must happen if we ever expect to avoid 
continuous and deeper recessions and to get the economy growing in a 
healthy and sustainable fashion. It also must happen if we want to 
preserve free market capitalism and personal liberty.
  The longer the delay in establishing a free market and commodity 
currency, even with interrupted blips of growth, the more unstable the 
economy and the more difficult the task becomes. Instead, it will 
result in what no one wants: more poverty and political turmoil.
  There are no other options if we hope to remain a free and prosperous 
Nation. Economic and monetary meddling undermines its principles of a 
free society. A free society and sound money maximize production and 
minimize poverty. The responsibility of Congress is clear: avoid the 
meddling so ingrained in our system and assume the responsibility all 
but forgotten, to maintain a free society, while making the dollar, 
once again, as good as gold.
  Now, I want to close with a quote from James Madison from The 
Federalist Papers, because the founders of this country faced the 
dilemma of runaway inflation with the continental currency and that is 
where our slogan comes from: ``It is not worth a continental.'' This 
was a major reason why we had the constitutional convention because 
they knew and understood the evils and the disastrous effects of what 
paper money could do to a society. These are the words of James 
Madison. He says, ``The extension of the prohibition to bills of credit 
must give pleasure to every citizen in proportion to his love of 
justice and his knowledge of the true springs of public prosperity. The 
loss which America has sustained since the peace, from the pestilent 
effects of paper money on the necessary confidence between man and man, 
on the necessary confidence in the public councils, on the industries 
and morals of the people, and on the character of republican 
government, constitutes an enormous debt against the States chargeable 
with this ill-advised measure.''

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